It's hard to believe, but the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
However, lately there are signs that buyouts are making a comeback. A recent example is Carlyle's $2.54 purchase of the government business of Booz Allen Hamilton.
But that's not enough to support the heavy dealmaking infrastructure on Wall Street. As a result, we are now seeing some major layoffs as well as the departures of key players.
For example, according to a piece in Bloomberg.com, the co-head of leveraged finance at Morgan Stanley (NYSE: MS), Ashok Nayyar, has left the firm. And the global leveraged finance chief at Deutsche Bank AG, Michael Paasche, is also leaving.
Of course, this doesn't mean that leveraged finance will go away. If anything, major private equity firms will likely bolster their own platforms. Or, we may see other banks entry the fray, such as Barclays Capital (NYSE: BCS).
This week, the co-founder of the Carlyle Group, David Rubenstein, paid $21.3 million for a copy of the Magna Carta. In an offbeat way, is this a sign of optimism for the private equity space?
Well, today Rubenstein gave an interview with CNBC. Basically, he thinks there are some compelling investment opportunities – especially in energy, healthcare, and financial services. What's more, he's bullish on emerging markets. He's not only excited about China but even Africa and the Middle East. For example, in Africa, Rubenstein thinks there are opportunities for mining and minerals, financial services, and telecom.
Although things may be remain somewhat slow in terms of deal activity, at least in the U.S., Rubenstein thinks sellers may be in denial on valuations. Also, to get deals done, private equity funds will probably need to pony up more equity. But, with the huge amounts of capital in these funds, that shouldn't be hard to do.
It's been fairly slow for private equity deal makers lately. So what to do? How about spend $21.3 million for the Magna Carta?
Well, that's what Carlyle's co-founder, David Rubenstein, did yesterday at Sotheby's.
Actually, Rubenstein is a political junkie. That is, he served in President Carter's White House (as deputy domestic policy advisor). His political savvy has been a nice complement to his deal making.
Of course, the Magna Carta is an amazing document, which helped to spark revolutions, such as free speech and even capitalism.
The good news is that Rubenstein isn't going to have the document as an ornament for his office. Instead, he plans to lend it to the National Archives.
The prior owner was the outspoken billionaire, Ross Perot, who purchase the document in 1983 for a mere $1.5 million.
One of the pioneers of private equity is The Carlyle Group. The firm has minted billions and is a major force in finance, managing about $76 billion.
But lately things have cooled off. For example, Carlyle's Blue Wave hedge fund is down 9.3% for the year (this is according to a piece on Bloomberg.com). The problem was exposure to pesky mortgage investments.
So it should be no surprise that Carlyle's co-founder, David Rubenstein, is kind of glum. He recently commiserated for the folks at the American Enterprise Institute (there was also coverage in TheDeal.com, which is a paid publication).
Rubenstein thinks that private equity may be facing some tough times, and looks at the parallels of the conglomerates of the 1960s.
It's a pretty apt analogy. After all, as private equity firms get bigger and bigger, they look like bloated entities of disparate business units. In other words, might there be lots of complications in managing all this?
I think so.
Besides, the other big issue is finding liquidity for these private companies. Keep in mind that the IPO market has yet to recover from its boom days of the 1990s. And, M&A appears to be tailing off. Oh, and with the credit crunch, how will private equity funds get financing for deals?
So far, there aren't many clear answers. Or, at least Rubenstein isn't giving us any ideas so far.
Chinese investors feel that they got burned when they took a stake in big private equity firm Blackstone (NYSE: BX). That IPO did not do well, so the disappointment is understandable.
But, the Chinese may be back. According to a report in the FT, the China Social Security fund, which manages over $62 billion in assets, has its eyes on KKR, Carlyle, and TPG. The fund is interested in a stake of 9.9% in at least one of the companies. The British newspaper quoted one analyst on the potential investment: "'China's interest in buying into overseas financial intermediaries is clearly part of a deliberate strategy,' said Isaac Meng, an analyst with BNP Paribas in Beijing. 'The government is hoping to do a better job in exporting its capital than the Japanese did in the 1980s.'"
That may all be well and good, but members of the US Congress are already concerned about the investment of China's Citic Securities in Bear Stearns (NYSE: BSC). It is unclear how such an investment would compromise US interests, but Congress could try to block these deals on the grounds that large investment and LBO firms control a huge portion of the investment capital in the US. They would not want any Chinese influence in the process.
The Congressional posturing on the matter is a red herring, but meddling by the federal government could simply make the Chinese wary of moving capital into the US. But, if Congress leaves the matter along, Wall Street firms are likely to have Chinese shareholders.
Douglas A. McIntyre is an editor at 247wallst.com.
A number of news reports in the last few weeks have drawn attention to the involvement of private equity firms in health care companies, particularly nursing homes. Now comes news that Congress wants to look into the situation. Senator Hillary Clinton of New York, a Democrat, and Republican Senator Charles Grassley of Iowa have asked Congress to investigate the situation.
The source of the growing concern about care at for-profit nursing homes owned by private equity firms is an article in The New York Times published in September. The title of the article sums up the situation pretty well: "At Many Homes, More Profit and Less Nursing." It seems that when private equity gets involved in providing nursing care, more money goes toward making investors comfortable and less toward the elderly folks who actually live in the facilities.
I doubt that too many readers will find this claim surprising. Private equity funds search for return on investment. If a couple thousand old people live a little less comfortably, or die a little sooner -- well, too bad. Profits must be made, and the higher the better. What may come as a surprise, though, is the size of this market. For example, the Carlyle Group plans to buy Manor Care Inc. (NYSE: HCR), the largest U.S. nursing home owner, for $4.9 billion. That's an awful lot of bedpans.
And it turns out that private equity firms are ideally suited to run these operations -- assuming that what you want is the highest possible profit rather than, say, excellent care for the elderly. Private equity excels at wringing out costs, and so has no trouble firing many of those expensive nurses who take care of the patients. Private equity also loves to create debt and ownership structures so complex that no one can figure out who actually owns a business -- thus shielding the owners from lawsuits. And the business deals with a powerless group of consumers, many of whom are subsidized by government payments. No wonder private equity firms are jumping into the business! Just hope that your elderly relatives stay healthy and strong . . .
In August 2006, The Carlyle Group created a new fund, Carlyle Capital Corporation Limited. Carlyle Capital focuses on fixed-income assets, including mortgages and other credit products. In July of 2007, Carlyle Capital raised $300 million in an IPO on the Amsterdam market, trading as CCC.
According to a piece today on Bloomberg, Carlyle Capital Corporation's net assets fell by 24% in August. At the end of July, Carlyle Capital reported $843.5 million in assets. At the end of August, it had $642.1 million. This loss of $192 million means that more than 60% of the funds raised in the July IPO have been wiped out.
The Carlyle Group has stepped in to support the sagging fund. It has lent it $200 million and purchased $900 million in assets. But you have to wonder how much Carlyle is willing to spend to keep this fund going. The credit markets are still a mess, and mortgages remain a risky and quite likely declining investment. Not surprisingly, shares in Carlyle Capital, at $14, are down 26% from the IPO price of $19.
The New York Times [registration] reports that the Carlyle Group and the NASDAQ Stock Market, Inc. (NASDAQ: NDAQ) are selling out to one of the countries -- United Arab Emirates -- from which two 9/11 hijackers -- Marwan al-Shehhi and Fayez Benihammad -- hailed.
Specifically, the government of Abu Dhabi, United Arab Emirates' capital, will buy 20% of Carlyle Group, valuing it at $20 billion. While yesterday, NASDAQ announced that is was selling 19.9% of itself to Borse Dubai, the Dubai government-controlled exchange.
But not a peep of protest is emerging from the White House. And why should it protest? This is the decade where it's better to be a barrel of oil -- or a country that sits on oil -- than to be an American. After all, the price of oil is up 242% to a record $82 a barrel since its January 2001 price of $24 a barrel. Meanwhile, since 2001, the median family income adjusted for inflation has stagnated. Bernanke's bailout has slashed the dollar to record low levels against the euro -- and since oil is traded in dollars -- that means people who drive will be paying more than ever.
Fortunately, in the case of NASDAQ, there is some rising anger in Congress akin to the successful effort to stop the sale of a company that managed U.S. port operations to a Dubai-controlled company. The administration's drive to sell our infrastructure to the enemy seems more consistent with its War on the American Middle Class than its so-called War on Terror.
I'm not surprised that Carlyle would sell out to the enemy since its senior advisers are so deeply embedded in the oil industry. But selling the stock exchange that takes technology companies public points another dagger at our economic jugular.
At the Private Equity Analyst Conference in New York yesterday, the co-founder of the Carlyle Group, David Rubenstein, has continued to be oblique on the question of going public. Hey, in light of the Blackstone (NYSE: BX) debacle, I can understand why.
Well, according to the Wall Street Journal [a paid service], Carlyle is taking another approach (at least for now). That is, the firm has snagged a $1.35 billion private investment from Mubadala Development Company, which is part of Abu Dhabi. Essentially, this places a hefty $20 billion valuation on Carlyle.
It's an important move. Carlyle wants to have a permanent source of capital, which can help with minority investment opportunities and even buying up other private equity firms.
Plus, in order to keep up the growth momentum, Carlyle needs to expand into new markets, such as the Middle East.
The investment points out something else: Abu Dhabi is quite bullish on the global financial markets. Besides its Carlyle investment, the government (which controls the United Arab Emirates) is also taking a large position in the NASDAQ as well as the London Stock Exchange.
At the beginning of this year, I wrote that Carlyle Group co-founder David Rubenstein was predicting that emerging markets would see a surge in private equity activity.
While he didn't say that the private equity money would be departing the West for that region, that may be what has happened. According to The New York Times, private equity firms are setting new records with the size of the buyouts funds they are raising for Asian markets: "... investors are expected to commit $25 billion more in the second half of this year to private equity funds in Asia, according to the Center for Asia Private Equity Research. That would be on top of $15.4 billion in fresh capital committed to regional funds in the first half of 2007, a rise of 57 percent over the period a year earlier."
With $35.7 billion in unallocated funds ready to be invested in the region, emerging markets could see private equity fueling a continued bull market. In addition, the confidence of firms like Carlyle, KKR, and TPG should assuage investors' concerns about the region. None of these firms have a reputation for speculative investment, and the rapid growth may be for real this time.
Use ETFConnect.com to find an emerging markets ETF for your portfolio if you don't already have one..
The Home Depot (NYSE: HD) has been a big disappointment to me this year and to long-term shareholders it has been worse.
The brutal housing market, slowing construction, tapped-out consumers, tightening credit markets, not to mention rampant company mismanagement, have all played their part. Then you have the competition from Lowe's (NYSE: LOW), so maybe I was just early and there is a lot of opportunity ahead. I tend to think so, but this story is about the sale of Home Depot's Supply Unit:
The original deal was for private equity firms Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice to purchase price HD Supply for $10.3 billion, now reduced to $8.5 billion. This is $1.8 billion less, but that is not the end of the story. Home Depot will be receiving 17.476% less money but is selling 12.5% less of the company so the real difference is a 4.976% reduction in the price. This is not such a bad deal since it now shares in the upside of the new entity's future. Some might argue a path to an upside that will be paved by a better management group.
Although I am sure I am in the minority on this issue, I think The Home Depot negotiated a good deal given the circumstances. It is better for all concerned. The banks have less exposure, the private equity buyers have less risk and a lower purchase price and HD gets to close the deal with some future upside. This may actually work out better than the original deal.
Does anyone believe that the new owners will not outpace HD's return on equity or invested capital? I would bet that remaining 12.5% interest in HD Supply doubles in value faster than Home Depot's stock value. Interestingly, while the words I read here and there make this deal out as a disappointment the action on Wall Street has the stock trading up as a I write, about $1.2 billion in capitalization. Given that the option of not closing the deal might have caused the stock to trade lower, the difference between the downside risk and the upside stock move probably equals or exceeds the $1.8 billion dollars. So I like the deal very much.
David Rubenstein, who is the co-founder of private equity firm The Carlyle Group, has been buying and selling companies since 1987. Now his firm has 30 offices around the globe, as well as $71 billion under management.
Interestingly enough, back in the 1970s, he served in a variety of political seats -- such as the Deputy Assistant to the President for Domestic Policy (under the Carter Administration). He has also practiced law for several prestigious law firms.
So what are his thoughts on the recent turmoil in the private equity world? Well, he gave an interview for the Wall Street Journal [a paid publication]. Basically, his opinions are in-line with those of other top dealmakers, such as from the Blackstone Group (NYSE: BX) and Fortress (NYSE: FIG). That is, we won't see mega deals (because financing has vaporized).
Also, sellers will need to get more realistic on valuations, which is never easy. In fact, many just may rather wait to do deals. In other words, private equity firms will need to work much harder to get strong returns -- and it will require more patience (Rubenstein thinks this could take a couple years).
There's been lots of buzz that the upcoming KKRIPO is dead. In fact, a recent report from The Times of London suggested that the offering has been postponed.
Well, maybe not. KKR has indicated that the rumor is not true.
I have to admire the optimism of KKR (hey, it's probably been a key the firm's success). No doubt, it's been a crummy time lately for private equity. There's a credit crunch. And, of course, the stock prices of Blackstone (NYSE: BX) and Fortress Investment Group (NYSE: FIG) have been miserable. It even looks like Carlyle is going to forgo an IPO for 2007.
But private equity is about the long term. And it's in bad markets where the opportunities seem to pop up, especially for those firms that are well capitalized.
A key test will be KKR's upcoming financing of the mega buyout of First Data Corp. (NYSE: FDC). If the deal can get done, there may be some hope for the KKR offering.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Home Depot (NYSE: HD) hoped it had sold its HD Supply business to private equity interests for $10.325 billion. Problems in the credit market trashed the deal.
That means that the buyers want a better price because they cannot raise the cake to make the purchase. Obviously, no sane bank or investment firm wants to make a high-risk loan for a high-leverage deal. Not with most of them holding the bags on other deals that they could not syndicate to institutional investors.
Market conditions are also causing the retailer to drop the price at which it will buy its shares in its previously announced "Dutch auction" tender offer to purchase up to 250 million shares of its common stock at a price between $39 and $44. Market conditions have caused the company to drop the price range to between $37 and $42 per share.
If the market needed a sign that the credit markets are on the critical list, this is it. One of America's largest companies lowering the price of a buyback and three premiere private equity firms unable to raise capital for a previously announced deal. Imagine how bad things are getting for less marquee deals.
Home Depot shares are down almost 6% in the pre-market.
Home Depot Inc. (NYSE :HD) -- volatility up into comments on pending sale of HD Supply. HD is recently trading down $2.40 at $35.33. HD announced it is in discussions with Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice for the purpose of restructuring the previously announced agreement for the sale of HD Supply. The discussions could result in material changes in the terms of transaction, including the $10.325 billion purchase price. HD will reduce the "Dutch Auction" tender offer to between $37-$42 per share and extend the expiration to 8/31. HD will announce EPS on 8/14. HD over all option implied volatility of 32 is above its 26-week average of 24 according to Track Data, suggesting larger risk.
Cypress Semiconductor Corp. (NYSE: CY) -- volatility elevated at 39 as CY near record high. CY is recently down 21 cents to $27.41. Third Point reported a 5.1% stake in CY. CY said on 10/6/06 "we have been exploring ways in which to more fully realize the value of our investment in SunPower Corp. (NASDAQ: SPWR) for the benefit of our stockholders. We have expanded the scope of our review to include a variety of strategic alternatives." CY September option implied volatility of 39 is above its 26-week average of 33 according to Track Data, suggesting larger price fluctuations.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
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It's hard to believe, but the credit crunch is getting close to a year old. When it first hit, the result was stunning as pending deals came under much pressure, such as with price renegotiations, litigation and abandonments. There was also an evaporation of mega deals.
This week, the co-founder of the Carlyle Group, David Rubenstein, 
One of the pioneers of private equity is 
. It should be a good read.
There's been lots of buzz that the upcoming 
Home Depot
